Strategy, Value Innovation, and the Knowledge Economy Garrett Vogenbeck Mariah Van Winkle Amanda Morneault Matt Smith Cody Mack

Value Innovation

Strategy and Competitive Advantage “ For the past twenty years, competition has occupied the center of strategic thinking” Focus on building advantages over the competition

Imitation vs. Innovation “When asked to build competitive advantage, managers typically assess what competitors do and strive to do it better” Many firms regress towards the competition by only achieving incremental improvement.

Unintended Consequences of Strategy Driven by Competition Companies take imitative approaches rather than innovating. Companies act reactively. This causes energy and resources to be expended on daily competition rather than creating growth. Emerging mass markets and shifts in demand become unclear to the company.

Example: Compaq vs. IBM In the early 1980’s, Compaq came out with the first IBM-compatible PC, and won the mass of PC buyers VS. Compaq Portable, 1983 IBM PC 5150, 1981

Putting the Blinders On Both Compaq and IBM ended up suffering with the emergence of the low-end PC market. Low price and user-friendliness were the true keys to success. At $669, the IBM PC Jr. was so overpriced that it wasn’t competitive in the market. IBM’s focus on feature enhancement caused themselves to lose focus on changing customer demands.

The Roots of Profitable Growth Research has shown a pattern of strategies that separate the less successful companies from the highly successful ones. Rather than continuously building an advantage over competitors, the highly successful companies do not make the competition the reference point for their strategies.

Value Innovation The highly successful companies strived to make competition irrelevant by providing buyers with a quantum leap in value. This type of strategy is called value innovation.

More on Value Innovators Whereas others focus on restraints of the external environment, value innovators find opportunities despite poor industry conditions. The emphasis on value places the buyer, and not the competition at the center of strategic thinking.

A Recent Study of New Businesses 86% of new businesses were ‘me too’ or value improvement ventures, while 14% were value innovators. The value innovators generated 61% of the total profits, the 39% by the others. Value innovation fuels growth and profits for a company.

Shifting the Basis of Strategy

A Neoclassical Economic View of Competition Firms and Innovations are seen as ‘black boxes’. The actions of a firm are determined by market conditions. In this situation, innovation is not endogenous. Cost and product performance are seen as trade-offs.

A Neoclassical Economic View of Competition

MARKET

A Neoclassical Economic View of Competition MARKET

In many industries, supply exceeds demand. Competition-based strategy in such a situation isn’t very powerful. Let’s look at two very different strategies: ‘second-best’ and ‘first-best’ strategies.

A ‘second-best’ strategy consists of competing for a share of contracting markets Zero-sum, marginal strategy Cutthroat Does not create wealth A ‘first-best’ strategy stimulates the demand side of the economy. Non zero-sum strategy Expands existing markets Creates new markets Generates new wealth

Make the Competition Irrelevant! The strategic focus of value innovators wasn’t to outcompete their competitors… It was to make the competition irrelevant through the creation of new and superior value

Value AND Innovation

Value without innovation – Focused on improving buyer’s net benefit on an incremental scale Innovation without value – Can be too strategic, wild, tech- driven, and/or futuristic

Value AND Innovation In order to value innovate, companies should ask two questions: 1.“Are we offering the customers radically superior value?” 2.“Is our price level accessible to the mass of buyers in our target market?”

Value AND Innovation Companies tend to focus on a solution to a problem Value Innovation “focuses on redefining the problem” in an industry – Shifts criteria to what matters to the customer – Creates new market space Callaway Golf

Value AND Innovation Companies tend to focus on a solution to a problem Value Innovation “focuses on redefining the problem” in an industry – Shifts criteria to what matters to the customer – Creates new market space Callaway Golf – Hitting the ball farther vs. hitting the ball more easily

Value AND Innovation Consistent with “creative destruction”

Value AND Innovation Consistent with “creative destruction” – Creating new and superior value makes existing things and ways of doing things irrelevant

 IKEA – Furniture  Starbucks – Coffee  Wal-mart – Discount Retail  Borders and Barnes & Noble – Bookstores  Enron – Gas & Utilities

 Fortune named: “America’s Most Innovation Company”   Value Innovations Created first national spot market for gas  Reduced risk and volatility related to gas prices Transitioned from production to knowledge economy  Employed traders, analysts and scientists  In addition to the needed pipeline personnel

 Potential for Increasing Returns Large Initial Cost  Microsoft – Windows 95 OS  Enron – Risk management tools  Wal-Mart – Logistical Software and System But then low marginal costs are achieved  Potential for Free Riding Rival vs. Non-Rival Good Excludability

Rival Good – Any resource that when employed by one company, cannot be used by another Non-Rival Good – A resource that can be implemented by multiple companies Virgin Atlantic Airways – “Upper Class” concept – Competitive Imitation – Reverse Engineering » Hybrids

 Can a company prevent others from imitating or using their resource, product or idea? Limiting access to the resource  Intel – manufacturing facilities  Starbucks – coffee beans Patent and Legal Protection  Use if available or applicable  Neither can truly protect intangible real value

 Strategic Pricing for demand creation High Volume Brand Reputation  Target costing for profit creation Increases profit margins Increases barriers to entry of potential competitors

Consumer Surplus at P1 Q1 Profit Center at P1 Q1 Q1Q2

Profit Center at P2 Q2 Consumer Surplus at P2 Q2 Q1Q2

Shifting Strategy Focus

The underlying foundation of business is changing due to: – New knowledge – Idea creation – Global diffusion

Shifting Strategy Focus The Building Blocks of Strategy Conventional Strategy Focus Value Innovation Focus 1) Competition Outperform the competition Seek radically superior value to make competition irrelevant 2) Customers Retaining and better satisfying existing customers Target mass of buyers- follow noncustomers to gain insight into trends 3) Corporate Capabilities Leverage and extend current capabilities Be willing to combine with other companies’ capabilities

Shifting Strategy Focus Conventional Focus:  Focus on the Competition- striving to match and/or beat the competition Reactive, incremental, and imitative moves While competition makes innovation indispensable it also makes innovation difficult to attain  Leverage and Extend Current Capabilities Limits opportunity horizons Resistance to change even if market is evolving away from your company  Retain and Extend Existing Customers Hesitant to resist status quo in fear of losing or dissatisfying existing customers

Shifting Strategy Focus Value Innovation Focus: Strategies must shift to thrive in a rapidly changing knowledge economy  Think beyond company boundaries  Goal is to create radically new and superior value  Focus on capturing the mass of buyers  Continue to monitor existing customers but also follow noncustomers closely- they provide insights into trends and changes  Form networks with partners

Making Value Innovation Happen

Three Key Changes Communication Organizational Change - Structure Organizational Change - Culture

Communication Change CEO Top management Top Down Strategy – Initially Emphasize Importance of Value Innovation Refocus current strategy Eliminate competition based thinking Strategic Retreats & Corporate Communication

5 Key Questions Reframe Strategic thinking Challenge Current Industry Conditions Offering an Advance in Buyer Value Consider Starting New Search for Value Commodities Total Customer Solution

Organizational Change - Structure Small Autonomous Teams Focus on business / product vs. function, region, or channel type Importance of Freedom Creativity, Ownership, Experience Teams with Diverse Backgrounds Creativity Structure yields potential Culture yields actual innovation

Organizational Change - Culture Compulsory Cooperation Unwilling In accordance with rules of organization Within your duties as an employee Implemented through force Not supportive of Value Innovation Voluntary Cooperation Trust necessary Supportive of Value Innovation Encouraged by Fair Process

Fair Process Engagement Explanation Expectation Clarity Idea Sharing and Voluntary Cooperation Value Innovation Plans and Rapid Execution Organizational Respect for Colleagues’ Intellectual and Emotional worth Strengthens desire for fair process Strengthens ability to value innovate Figure 9.4 The Positively Reinforcing Cycle of Fair Process

VALUE INNOVATION AS STRATEGY

Value Innovation as Strategy In Knowledge Economy Strategy creates pattern of Punctuated Equilibrium – Bursts of value innovation Must be supported by Proper Tactics – Business line extensions – Continuous improvements

Competitive Strategies Cost-leaders and Differentiators can survive – Cost-leaders on low end – Differentiators on high end Value innovators dominate market core Expand their markets by creating new demand

Market Share Walmart Gucci Dollar Tree

Questions?

How does using a “first-best” strategy benefit a company over another that uses a “second-best” strategy? Explain the difference between the conventional strategy focus and the value innovation strategy focus. How can a company prevent others from imitating or using their resource, product, or idea? Essay Question

Thank you and have a nice day. Cusumano, Michael, and Constantinos Markides. Strategic Thining for the Next Economy. 1st ed. San Fransisco: Jossey- Bass, Powerpoint templates from TemplatesWise.Com References